Banking Laws and Policies

The Nepal Rastra Bank Act, 2058 provides for an Audit Committee formed by the Board of Directors to strengthen financial discipline and internal control of the Bank. Its functions, duties and powers are as follows.

Functions and duties

1. To review the Bank's accounts and financial statements (balance sheet, profit and loss account) before they are placed for approval and to check that they give a true and fair view.
2. To oversee and evaluate the Bank's internal control system and risk management, and to see that it is effective.
3. To supervise the work of the internal audit department, review its reports and ensure that its findings are acted upon.
4. To review the reports of the external auditor and the Auditor General, and to follow up the audit observations and irregularities pointed out.
5. To recommend to the Board on the appointment, terms of reference and remuneration of the external auditor.
6. To ensure that the Bank complies with the Act, rules, directives and accounting standards.
7. To submit reports and recommendations to the Board on audit matters and on improvement of financial administration.

Powers

1. To call for any record, document or information of the Bank needed for the audit and review.
2. To summon any officer or employee of the Bank to give explanation or clarification.
3. To direct that a special audit or investigation be carried out on any matter, and to recommend action against those found at fault.
4. To obtain professional or expert advice where necessary.

Under the Banks and Financial Institutions Act, 2073, the following persons are disqualified from being appointed as, or continuing as, a director of a bank or financial institution:

1. A person who is insolvent or has been declared bankrupt.
2. A person of unsound mind.
3. A person convicted by a court of a criminal offence involving moral turpitude, such as corruption, fraud, cheating, forgery or theft (or of an offence under banking and financial laws), and not yet cleared of the stated period.
4. A person blacklisted or a loan defaulter of any bank or financial institution, or a guarantor of such a defaulter, or one whose loan has been written off.
5. A person dismissed from service of the Government, Nepal Rastra Bank or any bank, financial institution or corporate body for misconduct or financial irregularity.
6. A person who is already a director, officer or employee of another licensed bank or financial institution of the same class, or its auditor or legal adviser, so that there is a conflict of interest.
7. A person who has been barred or removed by Nepal Rastra Bank, or who has been disqualified under prevailing law.
8. A person who has not paid the call on shares or has not deposited the required amount due to the institution.

A person with any of these disqualifications cannot hold the office of director, and a sitting director who becomes so disqualified must vacate the post.

The Foreign Exchange (Regulation) Act, 2019 (BS) punishes contraventions of the foreign exchange rules, with Nepal Rastra Bank (NRB) as the regulator. The main punishment provisions are:

1. General offence – A person who contravenes the Act, or the rules or directives made under it (for example, unauthorised dealing in foreign exchange), is punished with a fine equal to the amount involved in the offence, or imprisonment up to three years, or both.
2. False statement or concealment – Giving false particulars or hiding material facts to obtain foreign exchange or permission is punished in the same way.
3. Misuse of facility – Foreign exchange obtained for one purpose and used for another is treated as an offence and punished accordingly.
4. Confiscation – The foreign exchange, goods and instruments involved in the offence can be confiscated by the Government.
5. Repeat offence – A repeated offence attracts a heavier (up to double) punishment.
6. Offence by a company or institution – The person in charge of management at the time, and any director or officer who consented or connived, is liable.
7. Compounding – NRB or the authorised body may settle certain offences on payment of the prescribed amount, without affecting the Government's right to prosecute.
8. Recovery of loss – The offender must also compensate any loss caused to the Government or others.

Role of the Banking Offence and Punishment Act, 2064 in Creating a Healthy Environment in the Banking Sector

Introduction The Banking Offence and Punishment Act, 2064 (2008) is a special law enacted to control banking offences, punish offenders, and protect depositors, customers and banks themselves. Before this Act, banking crimes were dealt with under the general law, which was inadequate. This Act has played a significant role in making the banking sector disciplined, transparent and trustworthy.

Major Roles of the Act

1. Control of Banking Offences: The Act clearly defines banking offences such as unauthorized banking transactions, misuse of bank funds, falsification of documents, hacking of banking systems, cheque fraud, and illegal withdrawal or transfer of money. By criminalizing such acts, it discourages dishonest practices in banks.

2. Protection of Depositors and Customers: The Act safeguards the hard-earned savings of depositors. If a bank or its official misappropriates deposits or refuses to return them without lawful reason, the depositor can seek legal remedy. This builds public confidence in the banking system.

3. Punishment to Offenders: The Act provides for imprisonment and fines. For serious offences, punishment may extend up to imprisonment and heavy fines proportionate to the amount involved. This deterrent effect prevents bank officials, directors and outsiders from committing banking crimes.

4. Regulatory Discipline: It makes banks and financial institutions more responsible in maintaining proper records, following the directives of Nepal Rastra Bank, and conducting transactions in a lawful manner. It also punishes those who obstruct or refuse to cooperate with inspection and investigation.

5. Recovery of Embezzled Amounts: The Act contains provisions for confiscating the property of offenders and recovering the embezzled amount. This helps return money to the affected bank or depositors and prevents offenders from enjoying the fruits of crime.

6. Institutional Transparency and Good Governance: By fixing accountability on directors, managers and employees, the Act promotes good governance, internal control and ethical conduct in banks. It also helps reduce non-performing loans arising from fraudulent lending.

7. Confidence of Investors and Depositors: A strong legal framework against banking offences assures domestic and foreign investors that their money is safe. This encourages savings, investment and the expansion of banking services, contributing to financial stability.

Conclusion The Banking Offence and Punishment Act, 2064 acts as a protective shield for the banking sector. By defining offences, imposing penalties, ensuring recovery of embezzled funds and enforcing discipline, it creates a healthy, secure and trustworthy banking environment. However, its effectiveness depends on strict enforcement, speedy investigation and impartial judicial process. If implemented properly, the Act greatly contributes to the stability and credibility of Nepal's banking system.

Past Efforts for Merger and Acquisition (M&A) of BFIs in Nepal

Meaning: A merger combines two or more banks or financial institutions (BFIs) into one; an acquisition is when one institution takes over another. In Nepal, M&A is used to reduce the number of BFIs, strengthen capital and protect financial stability.

Past efforts

1. Legal framework – The Bank and Financial Institutions Act (BAFIA), 2073 and the Companies Act, 2063 provide the legal basis; the Nepal Rastra Bank (NRB) approves and supervises M&A.
2. NRB Merger and Acquisition Bylaws/Policy (2068 BS onwards) – Introduced a voluntary M&A process and incentives such as regulatory relaxations and time-bound facilities for merging BFIs.
3. Higher paid-up capital requirements – Repeated increases in minimum capital (for example, Rs 8 arba for "A" class commercial banks) pushed smaller institutions to merge to meet the standard.
4. Monetary policy directions – Annual monetary policies repeatedly encouraged M&A, and NRB set time limits and directed weak institutions to merge or be acquired.
5. Institutional support – NRB provided guidance on valuation, due diligence and swap ratios, and handled integration issues.

Examples of mergers

• Nepal Bangladesh Bank merged with Everest Bank Ltd (Everest Bank continued).
• Nepal Investment Bank and Mega Bank joined to form Nepal Investment Mega Bank (NIMB).
• Global IME Bank resulted from the merger of Global Bank and IME Bank, and later absorbed Janata Bank and others.
• Prabhu Bank, Sanima Bank, NIC Asia Bank, Machhapuchchhre Bank and Laxmi Sunrise Bank grew through absorbing smaller banks and finance companies.
• Many development banks and finance companies merged or were acquired, mainly in 2072-2080 BS.

Major achievements

1. A sharp fall in the number of BFIs (from over 270 institutions at the peak to roughly 100).
2. A stronger capital base and better ability to absorb shocks.
3. Greater financial stability and lower risk of failures.
4. Capacity to finance larger projects and meet single-obligor limits.
5. Economies of scale and better technology and governance.
6. Wider branch networks and improved access to financial services.

Conclusion

M&A has consolidated the sector and made BFIs sounder, although staff integration, technology and cultural fit still need careful handling.